Title: Research Tests Lipstick Theory

Recent financial results from leading cosmetics firms have been mixed, but historical data from Kline suggests the U.S. downturn may give them reason for cheer.

Former Estee Lauder head Leonard Lauder first developed the counterintuitive lipstick theory that high sales of the beauty product are accompanied by uncertain economic times after the 2001 terrorist attacks.

The thinking behind the theory is that consumers turn to inexpensive luxury goods such as lipstick to console themselves when they feel the economy is putting high-priced luxuries out of their reach.

The idea is now being put to the test as the economy feels the strain of the sub-prime crisis and high oil prices.

Looking across the recent results of top beauty companies, it remains unclear whether the lipstick theory will hold this time round. Some of the biggest names in the business, such as L'Oreal and Procter & Gamble, struggled during the latest quarter while others enjoyed high levels of sales growth.

Furthermore, judging the lipstick theory by looking merely at results is problematic because cosmetics companies do not only produce goods such as lipsticks that could be considered indulgent but relatively inexpensive.

Supportive historical dataKline has instead looked backward through 50 years of sales data to find out whether lipstick sales really do rise as the economy sinks.

The market research asked its statistician, Noel Lim, to plough through the data and study the relationship between lipstick sales and various economic indicators. Strikingly, Lim found that when unemployment rises and consumer sentiment drops, lipstick sales soar.

"If the unemployment rate rises, one would expect demand for all goods and services to decrease, but in fact, the opposite is true for lipstick," said Lim.

Burrowing into the data shows, for instance, that for every 1% increase in the unemployment rate, women buy $25 million worth more of lipstick, according to Kline.

Although lipstick sales have been sluggish in recent years, Kline is confident that with declining consumer confidence the category is now poised for a comeback.

The industry also seems to be pinning its growth hopes on lipstick as Kline said fourth quarter 2007 ad spending on the category increased a whopping 41% compared to the previous year.

Financial impact of theoryLipstick sales may well rise, but questions remain over the other products cosmetics companies produce. Whether the lipstick theory can really be extended to cover fragrances or other luxury cosmetics categories is unclear.

Many commentators remain unconvinced that the lipstick theory will really affect the financial fortunes of leading companies.

ABN AMRO analyst Jeremy Fialko even cast doubt on the reasoning behind the theory. He told CosmeticsDesign.com that while consumers may be inclined to buy lipstick in a downturn, they are far less likely to be in department stores in the first place to be tempted into handing over their cash at the beauty counter.